After starting the day low against the Euro yesterday, Sterling actually recovered back to the mid €1.15’s after Theresa May officially started the Brexit process by triggering article 50. It was a challenge to foresee what would happen to exchange rates yesterday, and it seemed that market reaction was muted due to the fact it was expected and already priced into the market.
Her tone in the letter that she sent to Donald Tusk was also quite positive and conciliatory, which calmed the markets a little and meant the Pound was largely unchanged against the single currency.
Whatever your view, the fact is that we’re leaving the EU, not Europe; there will be many positives such as our ability to re-discover our role as a truly global Britain and will soon be able to make our own free trade agreements, rather than being only able to trade freely with the EU based on the fact they’re geographically close to us. Of course, there are many negatives to leaving the EU and single market. Will the positives outweigh the negatives? Only time will tell. In the meantime, the Pound is in for a volatile period ahead until we know how things will unfold.
Conservative MP Jacob Rees-Mogg said in parliament, recalling the words of Sir Francis Drake “There must be a beginning of any great matter, but the continuing unto the end until it be thoroughly finished yields the true glory. May I wish her good luck and good fortune in her negotiations”.
What happens next?
Moving forwards, the fact is that the process has now begun and the UK and EU can shortly commence negotiations. After months of uncertainty, the currency markets are now very susceptible to commentary that will be coming from the UK government and the EU, and any indications as to how the negotiations are unfolding will likely have a big impact on the value of Sterling against other currencies. Any signs that it’s going well and the UK will get a good deal will push the Pound higher, and vice versa.
It’s likely to take some time before serious discussions start. Initially I think the talks will focus on what is to be discussed when. The UK government want to discuss the exit terms and future trade agreements in parallel. The EU want to first negotiate the UK’s exit, before then moving on to our future relationship with the EU. So right from the off you can see the talks will be difficult and prolonged. We have an interesting few years ahead, and in terms of exchange rates, the last few months may prove to be the calm before the storm.
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